Shares are poised to fall when the market opens on Monday ahead of a critical meeting by the United States Federal Reserve that is expected to douse expectations of a premature exit from quantitative easing.

The S&P/ASX 200 Index is headed for a 0.5 per cent fall, futures indicate, after posting its best session of the year on Friday when stocks surged 2 per cent to close at 4791.8, snapping a four-week losing streak. The Australian dollar is buying US95.67¢.

On Wall Street, the S&P 500 fell 0.6 per cent to 1,626.73 and the Dow Jones Industrial Average lost 0.7 per cent to 15,070.20. Investors fear that an early withdrawal of the $US85 billion a month in bond purchases the Fed is undertaking will cause the prices of assets such as shares to slump without central bank support.

The Federal Open Market Committee, the branch of the Fed that sets monetary policy, will conclude its two-day meeting on Wednesday, US time, amid expectations that chairman
Ben Bernanke
will try and play down the significance of previous comments which suggested QE could be wound back as soon as this year and signalled the start of the tapering debate.

AFR
AFR

Inflation figures due on Tuesday should bolster the case for keeping the pace of QE stable.

A benign outcome will prove the Fed’s stimulus program is not creating a spike in prices, which is understood to be the biggest danger of unconventional monetary policy.

Wilson Asset Management chairman Geoff Wilson said the market had, in effect, made up its mind about the future of QE and was overwhelmingly expecting a reduction at some point. He thinks the Fed will probably keep QE going for longer than necessary.

“Everyone knows that interest rates at zero or close to zero are unsustainable and all the statistics coming out of the US are showing that things appear to be picking up," he said. “So even if the commentary was ‘hey we’re going to keep easy monetary policy for as long as we need it’ – I’m not sure how much the market will believe it."

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He added: “We’d have to see significant faltering in the pick-up of ­economic activity in the US for there to be any credence behind the fact that easier monetary policy will occur for a significant period of time."

Increasing belief tapering isn’t imminent

The yield on US Treasuries fell for the first week since April, signifying an increasing belief within the bond market that tapering is not yet imminent. Last week’s rise in prices also ends the longest losing streak since 2009 for 10-year notes, measured on a weekly basis, according to Bloomberg data.

While the discussion around tapering has dampened interest in the income trade that saw investors heavily buying banks and Telstra for their dividends, portfolios are switching to stocks exposed to the US recovery.

This strategy is even more compelling as the Australian dollar falls against the greenback.

Banks have been savaged in the May market rout when the sector lost 13 per cent of its value. On Friday, broker UBS upgraded three Australian banks to a “buy" recommendation because their share prices had fallen so much they now offered reasonable value.

Arnhem Investment Management fund manager Mark Nathan said that investors could still take more confidence from the banks’ dividend outlook than from, say, Telstra’s, because the banks had demonstrable dividend growth while Telstra hadn’t bettered its payout for years.

“In fairness, there will be some growth in yield and dividend but only to the extent that the earnings grow and the earnings are unlikely to grow faster than the overall market," Mr Nathan said. “The reality is that the yield trade may be over and you may not see yield compress much more, but investing in banks offers a reasonably attractive alternative to putting your money in them."